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Merchant power: a workable alternative?

In Pakistan’s energy scenario, the chickens have, literally, come home to roost. Years of indecisiveness coupled with the hackneyed assertions that Pakistan has more electricity than required has manifested into a situation where the nation’s foundations are now shaking. New words have entered the domestic lexicon and even the uninitiated are recognising and understanding the ramifications of these new or oft-used words. Circular debt, Rental Power Projects (RPPs), Independent Power Projects (IPPs), NEPRA, PPIB, Discos, power outages, etc are casually floated around every now and then. Moreover, WAPDA and KESC have become words of ridicule for residents in small hamlets and all the way to metropolitan cities. It seems that, today, electricity can bring political parties into power or even consign it into the wilderness.

With the advent of the new government in Islamabad, all eyes are on the actions that Prime Minister Nawaz Sharif will take to tackle this issue. It is not possible to wave the magic wand and say, “Voila! Let there be light”. What is more constructive is that all alternative channels be energised to lessen the magnitude of the power crisis. Experts and laymen have been huddling to come up with some pragmatic solutions as there is no other choice but to take the bull by its horns.

The distressing fact is that even though alternatives are available or could be harnessed, the proverbial bureaucratic red-tape, the high incidences of corruption, the inability to rewrite the rules and regulations, and the dishonourable vested interests have impeded the momentum so much that just trying to get out of these tentacles has become a gargantuan task for any investor or policymaker. Everybody and his next door neighbour are talking about the wonders of Thar coal, wind or solar power, cheap Hydel power through dams that are susceptible to provincial politics, and of course generating energy through biogas, garbage, or even imported tyres. There is also talk about fast track conversion of power plants on imported coal.

And even though the solutions listed above are doable and feasible, and some may be done on a fast track, frankly, many alternatives are still a long way into the future. What should be done immediately is to revisit the various rules and regulations that hamper or slowdown the efforts of investors and get these amended, modified or removed. These steps would introduce the concept of Merchant Power Plants (MPP) in the country.

The government must pave the way for MPPs by making it easier for investors to penetrate this field and take advantage of the back-breaking shortage of electricity. There is a need to allow potential investors to enter into a comfort zone in this sector. There should be no restriction on the use of fuel or on the minimum capacity for the MPPs. However, in keeping with the vision of the government to utilise coal, initially imported too, it is recommended that coal-based projects be encouraged. It is a good omen that NEPRA recently announced an upfront tariff of 9.65 cents per unit for large coal-based projects for 30 years while for less than 200MW it would be 8.275 cents. It is hoped that NEPRA will soon decide the tariff for less than 50 mw.

Merchant Power Plants (MPP) are not new in today’s world. Investors have developed over 200,000MW of power plants in the United States, while India has an active MPP programme too. MPPs are technically different in the sense that they are unlike the power plants operated by WAPDA or KESC who distribute power at a set price that is determined through a mechanism and approved by a regulatory body. They are legally and economically different from IPPs and plants owned by traditional power companies in Pakistan or, for that matter, even captive power plants of the industries. Unlike IPPs, the MPPs have no single sales contract for the term of their life and there is no guarantee about their continued income.

It should be understood that MPPs will not be large power plants and only generation-based. What is important is that capacity should not be the limiting factor. There are three guiding points that justify the case for MPPs. First and foremost is the yawning gap between installed capacity, between actual generation, and between immediate consumer demand. The second fact is that investment in power plants is still not forthcoming at the speed that is imperative. The third argument is that too much emphasis on regulations and the dependence on WAPDA or KESC are impeding the distribution of electricity.

Therefore, MPPs should be set up and their viability and feasibility would become sustainable through three options that could be availed by a potential MPP. An example of a MPP could be a large industrial unit that has set up a captive power plant of, say 30MW.

This unit can firstly use power for self-consumption, secondly under the system of wheeling, sell extra power to WAPDA or KESC or use the existing power lines for transmission to consumers within the area, and thirdly set up a grid to supply power to units within its own proximity. Of course, if there are more MPPs in any sector they could share ownership of the transmission lines to attain economies of scale and reduce investment costs. In each case, the rate per unit could be negotiated between the supplier and user rather than going through a plethora of documentation, useless inspections, mind-boggling regulations, and slow process of approvals. Thus, electricity would be treated as a commodity with its own market dynamics. This could attract investors from the stock exchanges and thus, in effect, become a sort of retail power market.

The rationale for allowing MPPs is pragmatic. At present the transmission and distribution losses are abnormally high and the main reason is theft, corruption, and free electricity. Secondly there is excessive governmental interference in the workings of the present energy sector companies. Thirdly, rates are regulated by the government and inefficiencies, management inadequacies, theft, overstaffing, cost of subsidies, etc are factored in to calculate the rates. Fourthly, since the government is unable to rein in the galloping circular debt, the impact is passed on to the consumer. More importantly, the gap between generation, transmission and distribution would not be reduced any time soon. Therefore, MPPs can be a game changer and for that reason should be debated and discussed by the economic planners of the country on an urgent basis.

As US Congressman from Iowa Steve King once stated: “That’s the key: get the constitution in place. Get rule of law in place, capital will come, electricity will follow.” This, in short, is the answer to our energy crisis.